Involved In Real Estate · Los Angeles, CA · Member since 2013 · 110 posts · 4 votes
I am seriously considering taking a HELOC against my home and using it to start my flipping business, or possibly as a down-payment on an income property (but most likely flipping).
Would love to hear from those who have taken a HELOC (for whatever reason), and find out: What your LTV was. How how much you were allotted. How much your monthlies were. And how much you were able to use at once?
My situation is this: I owe $413K to my loan. My home value is somewhere in the $650-700k range. I'm hoping I can get a HELOC of around $150K to start my business.
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
13y
I have two HELOCs. One on residence, where CLTV is 90%; other is a rental, where CLTV is 80% (rental was through Wachovia now Wells Fargo). Remember it is about the Combined LTV as to the limit of future advances that you will get on the LOC. These are interest only for a "draw period", with interest tied to (some number of points above) either LIBOR or Treasury rates; after the "draw period" there is a paydown period where the loan balance will fully amortize over the remaining term. The value at time of loan will be set by a fresh appraisal.
You can draw up to the full amount of the LOC, since the CLTV is already limiting the entire loan balance total to be less than value of the property. But the LOC can be "called" under certain circumstances; usually, if the collateral's value has diminished to the point where it's less than the amount of the original CLTV a lender will be at risk so call becomes more likely.
You will find that you can get a break on the interest rate if you allow for the bank to auto-draft from a checking account that is with the same bank; if you don't already have checking there, makes sense to open one and keep some minimal funds there to cover loan payments.
As to your example in the OP, let's use the following: $650k appraisal, $413K loan balance, 90% CLTV. So amount of total loans is CLTV times appraisal, or .9 x 650K = 585K; then subtract remaining loan balance from that and you have you HELOC limit of 172K. Now let's change the CLTV to be 80%: (.8 x 650K) - 413K = 107K. So the CLTV is really a big factor in how much you'll get. Now let's up the appraisal but stick to 80 CLTV: (.8 x 700K) - 413K = 147K.
That shows you want to try to find the highest CLTV you can get. Appraised amount increases will be multiplied by the CLTV to determine how much bigger the LOC might get. The appraisal in the last two examples changed 50K, multiply that by the .8 for the CLTV and you see a 40k difference in the limit for the LOC; and if you do the subtraction of the two results that's the same difference.
Real Estate Investor · Dallas, TX · Member since 2010 · 449 posts · 173 votes
13y
Hey Ben,
We've done this, so I have a bit of info for you.
We took a HELOC out against our primary in 2009 for emergency liquidity/investing. The primary was fully paid off. It was with USAA and our interest rate is 4.99% - I expect it would be lower now. We were limited to 50% LTV. Apparently, this is a USAA/Texas specific thing. Our credit is in the top bracket. As far as how much at once goes - we did use about 80% of the HELOC amount at one point as part of a cash purchase. No problems. They just asked what is was for and then approved it.
In our case, the absolute amounts are a lot lower. The HELOC was for about 75K. I'm not sure if this would be a factor or not.
Involved In Real Estate · Los Angeles, CA · Member since 2013 · 110 posts · 4 votes
13y
Harry M. - Great info, thanks so much! So your home was essentially worth about 150K and fully paid off and the bank approved you for half? Can you tell me what your monthly payments were on the amount you used? That is, if you're comfortable doing so. Thanks again.
Real Estate Investor · Dallas, TX · Member since 2010 · 449 posts · 173 votes
13y
Ben Kahle - the way I understand it (as least as far as I remember since it's been 4 years) about the 50% LTV thing is that there was some rule that limited HELOC's to that amount for TX, regardless of other factors that you would think would qualify you for more (income, credit worthiness, etc). Regarding monthly payment - the only mandatory part is the interest, so just the balance/12x0.0499 per month. It was around 250.00 at it's peak when we had around a 60K balance.
At some point, the draw period ends, and after that you have to pay back interest and principle.
-H
Rehabber · Beecher, IL · Member since 2013 · 101 posts · 21 votes
13y
I took out a HELOC on my primary residence to get started as well. The first one I ever did was paid for by my HELOC, then I used credit cards to fund the rehab. I rented it out, and after 6 months cash-out refinanced to get my money back and pay off the debt, plus I had a little extra for the next one. I still use my HELOC sometimes, but we mostly do flips now, sometimes selling with a lease option.
My HELOC was from a credit union with 90% LTV, no closing costs at I believe 2%+prime which has been around 4.75% for me. They charge interest only payments which were about $250 for me on $44k.
This was taken out in 2011.
HELOC's are one of the quickest and easiest way to start investing at a decent rate. Just be careful to use conservative numbers if you are new to flipping. Selling on a lease option is a good solution if you find the numbers are too tight.
Investor · Omaha, NE · Member since 2011 · 475 posts · 211 votes
13y
We did a HELOC in December to help purchase an apt. It is interest only and the home was debt free and the LTV was 33%. We used 98% of the HeLOC and plan to pay it off in a year and reuse as needed. Since we're paying off quickly and have no closing costs it's better than mortgage and having closing costs.
Real Estate Investor · Audubon, PA · Member since 2009 · 13k+ posts · 8k+ votes
13y
I have two HELOCs. One on residence, where CLTV is 90%; other is a rental, where CLTV is 80% (rental was through Wachovia now Wells Fargo). Remember it is about the Combined LTV as to the limit of future advances that you will get on the LOC. These are interest only for a "draw period", with interest tied to (some number of points above) either LIBOR or Treasury rates; after the "draw period" there is a paydown period where the loan balance will fully amortize over the remaining term. The value at time of loan will be set by a fresh appraisal.
You can draw up to the full amount of the LOC, since the CLTV is already limiting the entire loan balance total to be less than value of the property. But the LOC can be "called" under certain circumstances; usually, if the collateral's value has diminished to the point where it's less than the amount of the original CLTV a lender will be at risk so call becomes more likely.
You will find that you can get a break on the interest rate if you allow for the bank to auto-draft from a checking account that is with the same bank; if you don't already have checking there, makes sense to open one and keep some minimal funds there to cover loan payments.
As to your example in the OP, let's use the following: $650k appraisal, $413K loan balance, 90% CLTV. So amount of total loans is CLTV times appraisal, or .9 x 650K = 585K; then subtract remaining loan balance from that and you have you HELOC limit of 172K. Now let's change the CLTV to be 80%: (.8 x 650K) - 413K = 107K. So the CLTV is really a big factor in how much you'll get. Now let's up the appraisal but stick to 80 CLTV: (.8 x 700K) - 413K = 147K.
That shows you want to try to find the highest CLTV you can get. Appraised amount increases will be multiplied by the CLTV to determine how much bigger the LOC might get. The appraisal in the last two examples changed 50K, multiply that by the .8 for the CLTV and you see a 40k difference in the limit for the LOC; and if you do the subtraction of the two results that's the same difference.
Investor · Southeast, MI · Member since 2012 · 2k+ posts · 1k+ votes
13y
I currently have six HELOC's. As Steve Babiak mentioned, one was frozen. It wasn't called due, but I can only continue making the payments and not use the line anymore.
I would be leary of having two high of a balance on HELOC's as interest rates could go up at any time and those are usually adjustable rates. As long as you are careful, HELOCs are a great tool for investing.
I just did a refi on my primary house and got 3% fixed for 15 years. What's funny is that in 2006, I was getting 5.5% on my savings account at the bank. If rates go back up there, I will keep making minimum payments on the 3% fixed loan and stick extra money in the bank.
Involved In Real Estate · Los Angeles, CA · Member since 2013 · 110 posts · 4 votes
13y
Steve Babiak - Wow, thank you for such a detailed response. I've been wrestling with the math of it all. Your post really helped me get a clearer picture of my situation, which seems like a decent one. Thx again!